Benefits and Compensation

Pros and Cons of Monetary Incentives

Most employers are looking for ways to maximize employee productivity and efficiency. But how can employees be motivated to work toward this goal? Some say it can’t be done, that motivation is intrinsic and therefore, nearly impossible to influence through external means. Others say that there are plenty of ways to improve employee motivation and the key is finding what the employee values.

One of the primary means employers turn to in their efforts to improve employee motivation (and thereby increase productivity, efficiency, and profits) is money. Bonuses and incentive pay schemes are often looked at as a means to change employee behaviors. But what are the pros and cons of this approach?

Pros to Using Monetary Incentives to Motivate Employees

Let’s start with a list of some of the benefits of using incentives to motivate employees:

It is an easy and seemingly straightforward way to influence specific behaviors.

It does not require personalization–everyone gets paid, and nearly everyone wouldn’t mind being paid more!

Most employees do not like to be recognized and rewarded for high performance, and doing so appropriately can improve morale and retention.

Monetary incentives often do achieve short-term goals for businesses, such as increasing productivity or reducing problematic behaviors.

An incentive scheme can improve employee attitudes and improve the working atmosphere.

It can be a way to give extra compensation to top performers when there are constraints that don’t allow raises or promotions to be used.

Such a system may be perceived as fairer—extra effort is tied to extra money, unlike other systems where all employees get paid the same regardless of effort.

An incentive program can also be used as a recruiting tool.

Incentive programs (if implemented well) can make individuals feel that they have an element of control over their level of income.

Cons to Using Monetary Incentives to Motivate Employees

There’s a downside as well. Here are some of the potential pitfalls to using a monetary incentive program:

When used continually, a bonus or other incentive can come to be seen as an entitlement rather than a motivator.

It’s easy to get unintended consequences if an employer is not clear enough on the behaviors it is hoping to incentivize. The classic example of this is creating an incentive (or commission) for salespeople based solely on revenue generated, without any regard to profitability. Goods sold at a loss are not usually beneficial!

This type of program can sometimes actually become de-motivating—unfortunately, incentive schemes don’t always work the way they were intended. For example, consider an employee who just barely missed his or her goal (and therefore did not get the extra money). That employee may be less motivated going forward.

When monetary incentives are tied to group performance, it can create frustration if there are perceptions of unequal contribution among group members.

If incentives are based on competition among employees, it can lead to an environment where employees are actively trying to out-do their colleagues. On the surface that sounds like it could lead to high performance, but in reality, it can lead to employees sabotaging the efforts of their teammates or working on their individual goals to the detriment of the company’s goals.

Implementation comes with costs. It takes time and effort to set up and track incentive programs and ensure they’re paid out accurately.

Monetary incentives may be less effective than nonmonetary incentives, especially over time.

Monetary Incentives: What Should Employers Do?

To summarize, let’s look at some ways for employers to get the most of the “pros” and the least of the “cons”:

Think through the system to ensure that it is fair and will reward the right behaviors without creating an incentive for related unwanted behaviors (e.g., don’t reward unprofitable sales);

Set it up in such a way that it will not discourage teamwork;

Monitor the program to ensure there isn’t any cheating;

Create a direct link between the employee’s actions and the eventual reward—the employee should have control over whether they achieve the goal; and

Use goals that can be readily, objectively measured.

Do you use monetary incentives, nonmonetary incentives, or a mix of both? What outcomes have you observed from each type of incentive in your organization?

About Bridget Miller:

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.

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